From 24/7 Wall St. · Chris Lange · · 1m 10s
Suze Orman Warns Against 401(k) Loans for Credit Card Debt
Suze Orman says raiding your 401(k) to pay credit card debt risks a $44,000 tax penalty.
In brief
Suze Orman says raiding your 401(k) to pay credit card debt risks a $44,000 tax penalty. Suze Orman warns that taking money from a 401(k) to pay $30,000 in credit card debt could cost $44,118 in taxes and penalties. Originally reported by 24/7 Wall St..
Suze Orman's Warning
Suze Orman says you should not take money from your 401(k) to pay off credit card debt.
“You absolutely are not to take money from the 401k to pay off the debt.”
Tax Penalty Risk
Taking $30,000 from a 401(k) could cost $44,118 in taxes and a 10% penalty.
“To walk away with $30,000 after that tax and the 10% penalty, they must withdraw about $44,118.”
Credit Card Interest Cost
Carrying $30,000 in credit card debt at 21% APR costs $6,357 in interest over a year.
“Carrying $30,000 at 21% for a full year costs about $6,357 in interest.”
Age Affects Penalty
After age 59½, the 10% penalty on early 401(k) withdrawals is waived.
“After 59½, the 10% penalty goes away.”
Better Cash Source
Orman suggests using capital gains from taxable stocks to pay off debt without penalties.
“You have gains, take them.”
Tax Savings Plan
Selling appreciated stock gains at 15% tax rate could cover $30,000 debt in $375 monthly payments.
“If the full $30,000 were long-term gains taxed at that rate, the bill would be about $4,500.”
High Yield Savings
Using high yield savings accounts can cover tax payments without penalty.
“Set aside $375 a month covers it within a year, with no penalty.”
What to Do Next
Check your credit card interest rate, tax bracket, and 401(k) balance before raiding retirement savings.
“Rank every card by APR. Write down each balance and rate.”
What to remember
Suze Orman warns that taking money from a 401(k) to pay $30,000 in credit card debt could cost $44,118 in taxes and penalties.
